In any economy, there exists no less than one commodity or security of inelastic volume which is overvalued due to reservation demand. Ie: one scarce good which is money.

People, I feel, are starting to understand this. A lot of people read James Grant. Grant says:

To me the gold price takes the form of a very uncomplicated formula, and all you have to do is divide one by ‘n.’ And ‘n’, I’m glad you ask, ‘n’ is the world’s trust in the institution of paper money and in the capacity of people like Ben Bernanke to manage it. So the smaller ‘n’, the bigger the price. One divided by a receding number is the definition of a bull market.

You’ll notice that this had nothing to do with security analysis. This is conceptualizing, brainstorming, nothing to do with price/earnings ratios, other valuation methods like cash flows. It is a proposition or a hypothesis on what is driving the gold market. So the gold market is necessarily a speculative piece of business. It’s not to be confused with the kind of investment that Ben Graham wrote about.

UR is much cheaper than Grant's Interest Rate Observer. We too conceptualize and brainstorm. We try to be rigorous, however, at least where rigor seems called for. We were also on this five years ago - just so ya know.

For instance: why gold? Why not silver? Or silver and gold? Or, gosh, the good old dollar? It's certainly true that Messrs. Graham and Dodd have nothing to add on the subject. But I feel we can get considerably past Mr. Grant's "uncomplicated formula" - roughly correct though it is.

Why gold, not silver? This collective choice is a standard - a persistent group decision. Why does your computer speak IP, not IPX? The Internet, or something much like it, could have been built on IPX, a perfectly good internetworking protocol. Gold works as money. So does silver. So does nicely engraved government paper. Before the 19th century, we see a patchwork of gold and silver standards around the planet. In the late 19th, gold emerges as a global monetary standard, displacing and demonetizing silver. In the 20th, paper (mostly) displaces gold.

Normal economic calculation, macro and micro, assumes a stable monetary standard. But monetary standards change. Why and when? What happens when they do? What is the effect on traditional macro indicators - interest rates, GDP, CPI?

First, let's review the basic material.

There are two schools of thought on monetary standardization. One assumes that monetary standardization is inherently a sovereign function: the monetized good in any economy is what that economy's government wants it to be. Alas, we live in an age of state-sponsored economics, whose state-sponsored economists easily assume this chartalist theory. Chartalism by definition precludes spontaneous restandardization. If the gold standard is considered, which it generally isn't, it's considered only as a policy option. A bad one, needless to say.

Economists in the Austrian tradition (ie, legitimate economists) believe that monetary standardization is a normal market process - though, like all market processes, subject to government intervention. Clearly, the market today has selected dollars (USG liabilities) as a global monetary standard. Austrians agree that dollars and other fiat currencies are money. They also agree that the omnipotent state can compel its citizens to save in fiat currency. They disagree, however, that fiat currency is in all cases compatible with a free market - especially a free market in the precious metals. So for Austrians, restandardization is not only a policy, but also an event.

It's worth arguing for a moment with the modern super-chartalists or Moslerites, who have awarded their system the pretentious caption of "Modern Monetary Theory" or "MMT." I take the acronym as a personal insult: it conflicts with my own Moldbug Monetary Theory (MMT). Indeed, the same "modern" ideas are found in the great '30s inflationists Silvio Gesell and C.H. Douglas, not to mention Attwood a century earlier - butt of John Stuart Mill's immortal essay, "The Currency Juggle." The Juggle, indeed, has never been zanier.

But every juggle is based on some fundamental truth. It's important to recognize the fundamental truth behind this new outbreak of Ezra Pound economics, which is that fiat currency is sovereign equity. Dollars are best defined as shares of stock in USG.

These shares convey no corporate control and pay no dividends, but this does not make them worthless - the same could be said of Google's A shares, or even of Delta SkyMiles. USG redeems its paper for concrete benefits at its pleasure, as with any and all equity instruments.

Even USG's "debts" (such as Treasury notes) are not debt but equity, because they are denominated in equity (dollars). A Treasury STRIP or zero-coupon bond, for instance, is a form of restricted stock - financially equivalent to a dollar with a "not valid until" date.

Thus it is sheer nonsense (as Mosler will tell you) to talk of USG being unable to repay its "debt," because its "debt" is not debt but equity. If USG had contracted to deliver 20,000 tons of gold in 2020, it would have debt. If it had contracted to deliver 20 trillion euros in 2020, it would have debt. If it had promised to wash 20 million cars, it would have debt. Its promises to deliver its own shares, however, are no more than restricted shares. Of course, any corporation may issue any number of shares at any time. No sweat!

So the reality, unbelievable as it seems, is that USG has no debt at all. (This does not mean its financial condition is healthy: it is not healthy to fund continuing operations by issuing new equity.)

That fiat currency is sovereign equity, the Moslerite gets. It is his one big hedgehog truth. But what the hedgehog misses is that the dollar is not just USG equity. It is monetized USG equity. It can lose this status - and if USG follows Mosler's advice, it probably will. Alas, this would produce substantial purchasing-power decreases in your USG securities.

Given that 30% of USG's revenue is generated by issuing new equity, the dollar operation is already pretty far into the Ezra Pound spectrum. It is the incumbent standard, however, and this represents a form of capital - one fast being dissipated. Also, not a small thing, USG is sovereign - perhaps the only true sovereign on the planet.

(USG's financial status is better than it seems, not only because its sovereignty is so secure, but also because a meaningful financial analysis of USG consolidates the entire "private" banking system onto USG's balance sheet. If the banks are (not formally, but in reality) part of the government, bank debt is government debt; your securitized mortgage is a government security, your mortgage payment is government revenue. This "private" debt is at present expanding slowly and actually contracted in 2009. On the other hand, many projected future expenditures do not appear as debt in the Z.1 report.)

Securities, sovereign or not, are just like precious metals. They can be monetized (overvalued), or demonetized (Ben Graham valued). In a sense, the naive chartalist is like the naive goldbug, who believes that gold and silver prices represent "intrinsic value." In fact we can easily imagine a pure platinum standard, under which gold and silver trade at industrial prices. Since gold and silver are already slightly monetized, we'd expect these prices to be much lower than today's.

Is USG both able and willing to force its subjects, not to mention the rest of the planet, to save in its own securities? If so, its securities will never be demonetized. If not, we must consider the possibility that Americans and/or foreigners will move their savings to another currency, such as gold. Regardless of how we calculate USG's market capitalization, at present exchange rates its total liabilities are well over a million tons of gold - 10 times as much as has ever been mined. This seems a bit rich, especially for an enterprise so deep in the red.

USG is an awesome operation. Its nuclear aircraft carriers are pimped beyond belief. Its fighter planes are the best fucking fighter planes in the world, and it owns California. Its paper is certainly not without value. But, just as with gold, we need to distinguish between the hypothetical intrinsic or "Ben Graham" price (set by non-monetary demand, and immeasurable while the good is monetized) of USG shares, and the monetary price of USG shares.

For which the denominator is, of course, gold. Anyone can practice gold accounting - whatever country they live in. How many USD do you have? How many milligrams Au does a USD run you these days? Multiply and get your net worth, in gold. It's a weight, which is actually kind of cool.

(Of course (having upgraded to gold accounting), if you keep your entire portfolio in USD - or USD-denominated securities - it may fluctuate alarmingly. And, more alarmingly, generally in a downward direction. That's a good indication that you should diversify out of this marginal and unstable soft currency. What next, naira? Baht? Imagine you're a reasonably wealthy person - a retired cardiac surgeon, for instance. Imagine you admitting to your new accountant: "Oh, yes. Of course. I keep all my money in baht." Even if you lived year-round in Chiang Mai.)

Under gold accounting, consider the effect of new dollar issuance on dollars priced in gold. In the intrinsic or "Ben Graham" analysis, issuing new shares dilutes all existing shares, while leaving the market capitalization unchanged. A share is always defined as a fraction of shares outstanding. By issuing new dollars, USG effectively expropriates existing dollar-holders, salami-style, to pay its ongoing expenditures. Ben Graham doth frown.

But this intrinsic analysis is not in fact relevant to dollar prices, because dollars are monetized. Consider a gold standard in which all gold is in a central repository, and the medium of exchange is warehouse receipts denominated in fractions of this grand vault. Now suppose the gold is radioactive; 5% of it decays every year, resulting in a corresponding decrease in industrial utility. Will this affect the monetary system (assuming it remains the standard)? Not at all, as the gold is never used. The industrial price of a monetary good is purely hypothetical. Likewise, a securities analysis of the dollar yields no relevant results.

Not that issuing new dollars does not, ceteris paribus, increase the price of goods in dollars. But this is monetary inflation, not stock dilution; it plays by different rules.

For instance, if USG delivers $5 trillion in pallets to Bill Gates, and Bill stores the cash in a hole in the ground, the Ben Graham dilution is considerable, but no price inflation whatsoever can be expected - an extreme reverse Cantillon effect. Conversely, if the $5 trillion goes to Chinese peasants with a high marginal propensity to consume, we can expect considerable increase in the prices of noodles and soy sauce, but perhaps less in luxury yachts (except inasmuch as a soy-sauce tycoon or two needs a luxury yacht).

When restandardization is a possibility, the intrinsic value of a monetary good still matters. Intrinsic value represents a put option against the horrific possibility of demonetization. Hence, if gold, at present lightly monetized, becomes fully demonetized, your gold will still make pretty earrings and excellent electrical contacts. If dollars, at present heavily monetized, demonetize, they remain Federal Brownie Points which USG may choose to redeem for valuable goods and services. Ben Graham would be happy to snap them up, of course at a low, low price, and install a new CEO who can turn the operation around.

Should this influence your desire to save in dollars and/or gold? It should, but as a relatively minor factor. The intrinsic price is generally much lower than the monetary price, for both metals and securities.

So much for dollars. Fiat currency, though historically evanescent, is no exception to any valid theory of money. But the enormous cognitive complexity of existing fiat financial systems makes for poor thought-experiments. Therefore, we'll consider only restandardization between metallic currencies. If we need to create these metals, we'll need alchemists. As a convention, we'll suppose that silver is collapsing (due to excessive alchemy), and the new standard is gold.

Let's answer the question again. Why and when does monetary restandardization happen?

Moldbug Monetary Theory (MoMT) is a post-Austrian theory of money. It is a minor refinement of Mises' standardization theory, which asserts that money is standardized by the demand for a standard medium of exchange. Rather, I assert, the demand is for a standard medium of saving.

In a pre-industrial or even pre-electronic age, it's easy to understand the standardization of media of exchange. If Thag the axe-maker wants silver for his axes and all you have is gold, you have to go fetch Drog the money-changer, which is a pain in the ass. However, on a modern (or at least future) trading platform, translating commodities is a matter of milliseconds. Thus it would appear that the demand for a monetary standard is epsilon. You can buy axes with pork bellies, no problem.

Or consider an economy in which the daily medium of exchange is silver, but all significant silver accounts are converted to gold overnight. This economy demands a very small amount of silver (petty cash) and a very large amount of gold (savings and other long-term positions). Hence, it is one in which silver is substantially demonetized - yet the medium of exchange.

But in a modern economy, anyone can save in anything. Retiring in 2030? You can put your entire retirement portfolio in 2030 pork-belly futures. If you don't want to spend your entire old age gnawing on pork bellies, you can trade these for other goods.

So it's clear why the whole world needs one standard for Internet packets. It's also clear why it might want one standard for payments. It's not as clear why it needs a standard commodity (or security) of saving.

Probably the easiest way to understand monetary standardization is to forget about Thag, Drog, and the historical origin of money, and consider only the problem of restandardization: selecting a new standard when the existing standard collapses.

The fundamental phenomenon of monetary restandardization is Mises' "flight to real values," which sounds better in German: Flucht in die Sachwerte. You will often hear of consumers buying gold, land, foreign currencies, etc, to "preserve their savings" against "inflation." This intuitive understanding, though roughly correct, must be tuned before we can proceed.

The goal of a rational economic actor in the Flucht is not in fact to preserve the purchasing power of his assets, but to maximize it. The alchemists have figured out to turn lead into silver. Silver, as a currency, is toast. You hold silver for your retirement in 2030. Run away!

You need to sell your silver and buy some new medium of saving X, which you will sell in 2030, in exchange for pizza, cruises and wine. What X should you choose? What X will get you the maximum pizza, cruises and wine? (Yes, instead of buying spot X, you should probably buy X futures maturing in 2030. You still need to choose X, as there are no pizza futures.)

The trick to understanding this decision is understanding its collective nature. Whatever X you choose, others will choose that same X. This will affect the market for X - ceteris paribus, driving up its price. If "real value" means Persian rugs, the Persian-rug market will boom. If this price increase is sustainable, you are buying into the next monetary standard. If it is not sustainable, you are buying into a bubble.

Thus, the goal of the rational actor is to choose the X that everyone else will choose (assuming they choose right), but choose it first. In standards terms: pick the winner, be an early adopter.

Value investors often describe a commodity or security already popular with other investors as a "crowded trade." This is by definition an overvalued good. When a crowded trade un-crowds, a bubble pops.

The pons asinorum to success in the Flucht is to reverse the normal investor psychology of avoiding the crowded trade, and crowd instead into the most popular trade, finding the most overvalued good. This will become the standard trade: money, which is the bubble that never has to pop. The strategy is a Nash equilibrium: the correct strategy for everyone to follow, if everyone follows it. It needs some refinements, of course, discussed below.

When the Flucht is finished and the restandardization process is complete, instead of a large number of somewhat overvalued storable commodities, we see one extremely overvalued storable commodity - again, money. As for the runners-up - goods that became overvalued, then returned to industrial price equilibrium - they look like popped bubbles. They are popped bubbles. Tulip bulbs, for instance, are almost like a monetary good, but not quite.

One metaphor for monetization is that of a storage vessel, like a battery for electricity or a tank for compressed gas. When people buy into the currency, they are charging the battery and compressing the tank. When they sell out, they are discharging the battery. When new currency is created (perhaps by alchemists) without a buy-in, the tank has sprung a leak. Etc. The charge, or the pressure, is simply the market capitalization of the entire present (and discounted future) monetary good.

But wait. Why did we have this Flucht in the first place? What happened to silver? We know intuitively - too many alchemists around. Let's try to make it a little more rigorous. What is the correct, rational, Nash-equilibrium strategy for the flight to real values?

To pick between silver and gold, we need two variables: interest rates in silver and gold. An interest rate in any good can be restated as the price of the future good in the present good - a discount rate. Most people are used to interest rates, but I like discount rates better - I feel they are more intuitive. However, the two are equivalent and can be used interchangeably.

If there is a 20% one-year interest rate in silver, you can exchange one gram of present silver for 1.2 grams of one-year-later silver, which means the price of a gram of one-year silver is 0.83 grams of present silver. Of course, there is not a single interest/discount rate within any good, but an entire yield curve - the price of four-year silver cannot be computed from the price of one-year silver. But we'll forget this important fact.

Of course, there is a discount rate in gold as well. There is also a current exchange rate between gold and silver. Since we can calculate the price of future silver in present silver, the price of present silver in present gold, and the price of future gold in present gold, we can compute a rather interesting number: the price of future gold in future silver, or future gold-silver ratio (FGSR), for any instant after now.

In short, the interest rate in each of these currencies, combined with the present exchange rate, defines a prediction market for the future exchange rate. On January 1, 2012, it is possible to compute an FGSR for January 1, 2013 - at least, if you know the current GSR, the gold lease rate, and the silver lease rate. Over time, this FGSR will converge on the actual GSR for its date. The prediction, while not guaranteed to be correct, is arbitrageable: if you know your prediction is better than the market's, you can profit.

This equivalence is an accounting identity. What do identities tell you? Murray Rothbard once parodied Irving Fisher's quantity theory of money, MV=PQ, by saying "the volume of water that hits the ground is the same as the amount of rain that falls from the sky." A statement which, while true, does not enable you to predict the weather. We know the identity; what is the causality?

The causality in this identity is particularly peculiar. The future exchange rate is decided by interest rates within each currency - the supply and demand between present and future gold, and present and future silver. Therefore, the predictors are not moneychangers; they are not people who know anything about exchange rates. Therefore, although the prediction market is correctly defined, its players are not generally informed about the question it predicts.

We'll return to this interesting paradox. But first: to decide between silver and gold, what do we need to know? Simply the ratio between gold interest rates and silver interest rates. This will tell us the extent to which silver is expected to depreciate against gold.

If gold interest rates are 20% and silver interest rates are 10%, which would you prefer to hold? Would you say: look at those juicy gold rates, I should be in gold? You mean not "hold" but "invest in" - a very different concept. If you can invest in gold at 20% or silver at 10%, whichever currency you start from, the decision is neutral: the increased return in gold will be canceled by the expected currency depreciation.

Are you willing to exchange present money for discounted future money? In other words, to lend? Bear in mind that lending does not decrease the set of currency holders. If you lend money to someone, it's because he either wants to hold it himself, or lend it to someone else who will hold it. Thus, we cannot evade the contest for holders. The true saver is the "hoarder," not the lender.

If gold rates are higher than silver, everyone should (ceteris paribus) prefer to hold gold rather than silver - simply because silver is depreciating against gold. Thus, we see exit pressure out of silver and entry pressure into gold. The silver battery is much taller than the gold battery, because silver is the monetary standard and gold is the upstart. However, money is leaking out of the silver tank into the gold tank, as rational hoarders obey incentives.

But there is worse ahead for silver, because this tendency is self-accelerating. As silver holders bail out in favor of the harder currency, gold, they create pressure on the spot exchange rate, which of course is set by supply and demand. Thus, gold goes up and silver goes down. This tendency can continue until gold is fully remonetized, silver fully demonetized.

Our first-order strategy (not, of course, to be construed as financial advice) to game players is thus: of any two competing currencies, hold the appreciating one: that is, the one with the lowest interest rate. As everyone else follows this strategy, the appreciating currency will appreciate even more, until eventually there is only one. Gold is money, silver is stuff.

This strategy has some obvious deficiencies - or at least, raises some obvious questions.

Why doesn't this happen all the time? How hard is it for a non-monetary commodity to exhibit interest rates lower than those of the present monetary standard? Does this process really have to run to termination once it begins? Is epsilon sufficient to initiate the chain reaction, or can a current standard sustain its dominance given some mild exit pressure?

But first, we have a causal inconsistency to resolve. Earlier, we said that the gold-silver ratio is predicted by interest rates within each of these currencies. But now, it seems, the ratio is set by supply and demand to exchange gold for silver. These seem like very different economic activities, so perhaps it's puzzling that they would produce the same number.

In fact, both statements are true. The GSR is predicted in the future by interest rates, and set by supply and demand in present. If supply and demand sets a different number than past interest rates predicted, all that means is that the prediction was wrong. Yes, Virginia, this happens.

I promised not to say anything about dollars. But in fact, the gold-dollar ratio (GDR) has been rising by about 20% a year for the last decade. Was this predicted by interest rates? No. Do interest rates predict a continuation of this trend? No. Does this mean that you could walk down the street right now, and find a $20 bill on the sidewalk? Wouldn't preclude it at all.

In fact, it is impossible for loan markets in dollars and gold to predict this result, because there is no such thing as a negative interest rate in a loan market - the transaction is meaningless - and dollar interest rates, at least official rates, are well under 20%. Nonetheless, over the last 10 years, simply holding gold has produced a better return then almost any real capital activity. In other words, the gold futures market's prediction of future gold prices has been reliably wrong, in the same consistent direction, for the last decade. A puzzle for Professor Hanson!

What is the problem here? Where is the misprediction coming from? It is coming from the fact that the lending market, since it does not understand the monetary standardization game, cannot play it. If it could play this game, we would see its prediction rapidly converge with the reality of the exchange market.

How would this work in practice? If gold predictably appreciated by 20% against silver, but the loan markets predicted only 5% appreciation, lenders would drive up silver interest rates to 15%, by offering lucrative investments in "enterprises" whose only activity was to hold gold - hedged by the market's modest and incorrect prediction of appreciation. Bonds issued by these ventures would drive all other bonds off the market. Of course, in reality, no such bonds can be offered, because a bond is a fixed-income instrument and the exchange market is inherently unpredictable.

The interest-rate signal can also be disrupted - for instance, by lending alchemists who create present silver to buy future silver. By increasing the supply of present silver at any time, this can be expected to increase the price of present silver in present gold. But it certainly does tend to lower interest rates. The alchemists, of course, should be careful that they don't find themselves buying future silver that is generated by the profits from holding gold. This would leave them pouring silver into an infinitely deep hole.

If the signal is absent or disrupted, speculators can speculate - and they do. In all cases, this involves being short silver and long gold. Thus we see the cycle again: predictable appreciation of gold over silver, generates exit pressure in silver and entry pressure in gold, which generates predictable appreciation of gold over silver.

(In the dollar-gold market of the past decade, although we cannot see gold's rise predicted in the the futures market, we can see it reflected in a market of generally savvy speculators: gold miners. Miners can choose between selling future production forward into the futures market (hedging), which they will do if their own price predictions are equal to or lower than the market's prediction; or selling the gold when they produce it. Sure enough, the global gold hedge book rises in the '90s as gold is falling, and drops (to almost zero) in the last decade as gold rises. This indicates an accurate perception of market inaccuracy by expert speculators.)

We see the fundamental instability of monetary competition. Stable systems are buffered - they experience negative feedback. But this is very much a positive-feedback story. Whoever starts winning, can be expected to keep winning. A tiny breath of air, and the pencil, balanced on its point, falls over.

This explains some facts - for instance, why bimetallic standards are historically unstable. Across the millennia, governments are always trying to fix gold-silver ratios, and always failing. One money drives the other out by Gresham's law. But even if no one is so foolish as to fix this unfixable price, in the end there can be only one.

As natural market fluctuations push one metal above the other, the rational saver will rebalance into the rising standard and de-diversify away from the falling. As gold rises and silver falls, he will exchange silver for gold. Or at least, the sooner he figures out this strategy, the more gold he will end up with. The collective behavior of all rational savers results in an industrial silver market and a gold standard. Thus, the bimetallic standard is like a pencil standing on its point: stable only as a perfect mathematical abstraction.

The instantaneous feedback is positive. But is there any negative feedback? As the pencil falls, is there a magnet that catches it and stands it back up?

Consider the case of competition between ordinary 20th-century fiat currencies. These predictably depreciate against each other all the time - that is, different currencies exhibit different interest rates. Why doesn't all international currency competition collapse, as our gold-and-silver model has? Why didn't everyone in America in 1979 switch to D-Marks?

Good old forex has a very powerful buffer mechanism: the balance of trade. If country A starts to adopt country B's currency, country B's currency rises versus country A, which gives country B (ceteris paribus) a trade deficit relative to country A. This implies a flow of money from B to A: negative feedback. This feedback is absent from our gold-silver model because, and only because, we've assumed that gold and silver users are homogeneously distributed.

There is another negative feedback, however: monetary production. This is probably the strongest stabilizing element in metallic currencies.

The ideal currency is perfectly inelastic in volume: no new money can be created. Elasticity is defined as a percentage of the stockpile: how much work does it take to create 10% more gold than exists at present? Or to put it more precisely: how much gold per annum, as a percentage of gold already mined, will be mined at the present price?

We can look at monetary elasticity through two lenses: interest rates and exchange rates. We should expect higher interest rates in an more elastic currency, because more elasticity implies production of more future money, whose price will therefore drop. We should also expect this currency to depreciate, because we can compute exchange demand not in unadjusted physical terms, but in relative terms - not as grams of metal, but as percentages of the entire market capitalization of that metal.

Suppose the silver battery is neither being discharged into the gold battery, nor the gold battery into the silver battery. Priced in either metal, the ratio of total gold stockpile capitalization to total silver stockpile capitalization remains constant. However, gold is being diluted by new production at 5% a year, whereas new silver is 10% of the silver stockpile.

Thus, in relative prices, the GSR remains constant. But in grams of metal - which is the actual GSR - gold appreciates by 5% against silver. Again, this appreciation will be magnified by positive feedback.

So where is the negative feedback? Remember, in our model, silver starts out as money, and gold as an industrial metal. Alchemists, however, have figured out how to make 5% more silver a year than gold. So silver energy starts to flee into gold, and gold starts to go up.

But wait! As gold's price increases - perhaps stratospherically - its elasticity changes. At the original, industrial price, gold was less elastic than silver. But to win the monetary game, its price in silver must rise by a factor of (let's say) 100. This is because silver falls, of course, but let's say gold's price in a neutral commodity - like wheat, a grain often eaten by gold miners - rises by a factor of 10.

Moreover, because gold was not a monetary metal, it has a small stockpile. Therefore its old elasticity experiences a brutal double whammy: much higher prices, much smaller base. Gold rises under its own power until its elasticity equals that of silver; possibly it rises on momentum, after that; and then the feedback becomes negative. The gold bubble pops. The old standard, silver, which was stable after all, reasserts its unquenchable will to monetary power.

Our goal, remember, is not to select the X ahead at present, but the X who will win the game: finem respice. With our first-order strategy, money rushed into gold not to correct a supply-demand imbalance in the industrial gold market, but to speculate on a monetary transition from silver to gold. But if that transition cannot actually occur, it has no reason to happen in the first place, and the rational herd will stay in their present standard money - silver.

Thus a correct, second-order strategy to pick a winner has to consider the monetary pressures across the whole path to complete monetization. If the leak will reverse direction halfway through the process, the process cannot complete and should never start. If large price increases in a commodity would cause a stockpile blowout, the walls of the tank are too thin. The whole premise of monetary restandardization is that the new currency will be stable and permanent.

Note in general the social effect of a total restandardization. The result is nothing less than a general redistribution of wealth - or at least, money. When silver goes down the toilet and gold becomes king, all the silver in the world has to pass through the gold-hole. This is Grant's "1/n." He who exits first is a mogul. He who exits last finds his portfolio has turned into a small stockpile of industrial metal - a metal the world has enough of right now. Similarly, if he has any Semper Augustus tulips, he can always plant them in his garden.

Indeed, the political effect of this transition is hard to understate. But that's a separate post. Ideally, a well-run political system will not let such a chaotic, spontaneous wealth redistribution happen, but will bend to reality and orchestrate an orderly liquidation. This is especially straightforward when the transition is from a fiat to a metallic currency. It is not especially difficult to establish a liquidation price at which all fiat obligations can be repaid in metal. The main problem is that any such ordered liquidation involves a large discontinuous transition in the exchange rate, which makes it a difficult policy in practice to plan and implement.

What will happen to interest rates, inflation and growth during a spontaneous remonetization? We're finally in a position to answer the question we started with.

Demonetizing silver in favor of gold means a striking fall in the silver-gold ratio, which normally implies inflation in the silver price of all goods, deflation in the gold price of all goods.

But wait: we have another causality problem. This one is a frequent bugaboo of arguments between goldbugs and deflationists. Prices are set by supply and demand. If the price of bacon in silver is to increase, where does all the extra silver to bid up bacon come from? One deflationist writes:

My argument is simple, and I will not yield ground to any hyperinflationist who fails to explain, if the system collapses, where the money will come from to bid tangible assets skyward.

In other words, inflation means more money chasing the same goods. Where's the more money?

There are two ways to answer the question. The first is to point to the enormous stockpile of monetary silver that built up while silver was money. Previously, this metal was hoarded by savers; gold has displaced it in that role; Gresham's law pushes it onto the market, increasing velocity as people try to spend their silver on bacon while silver can still buy bacon.

This is an accurate answer, but it is confusing, because it answers the question from the opposite direction. A better way to say it is to say that prices in silver are a function of purchasing power in silver, which is a function of everyone's net worth as measured in silver.

After the restandardization from silver to gold, everyone's net worth in silver has massively increased. Why? Not because there is much more silver in the world - because everyone's portfolio has been converted to gold, which has been revalued in silver. Thus, their purchasing power in silver, by the end of the transition, can and should considerably exceed the amount of silver in the world.

This is a little tricky to understand, so let's go back to the real-world players. It is not silver but the dollar which is the falling incumbent currency. To holders of gold, this is of course deflation - a most salubrious phenomenon. Holders of gold (and dollars) likewise had a blast during the Weimar experience. Their wallets turned into fountains of money.

It is these fountains which bid up prices. The new purchasing power comes from the exploding portfolios of gold's "early adopters." As this effect spreads from a few Internet nutcases and daring hedge funds, out across the broader global economy, that economy (still on the dollar standard for most prices) experiences a gold-driven wealth effect. Consumer spending rises; the same sort of broad economic boom as the '90s tech-stock boom is seen.

On the dollar's last day as a meaningful unit of account, total dollar net worth is at its historical peak. If there is a free market in future dollars (unlikely), future dollars in an expanding dollarsphere will be cheap relative to present dollars, and interest rates therefore high.

Best of all, unlike theglobe.com, this boom is sustainable. Ideally, it terminates in an allocated gold standard with no debt - the American and European economies at present, of course, being brutally overcapitalized. The dollar debt will be largely inflated away - along with any dollar savings which tarry too long in that currency. Can we imagine a debt-free world? Yes, we can.

(Except by actual gold-generating ventures (such as gold mines), gold debt will not be generated until remonetization completes. With gold rising like a rocket, there is simply no practical venture that can exchange discounted future gold for present gold at a profit - at least, not a venture that operates a business in a dollar economy, for in dollars this venture would be wildly profitable. Thus, gold interest rates will be low, and forward sales restricted to gold producers - if the futures market can match the producers' predictions of appreciation. Otherwise, producers will not hedge, and there will be no gold lending at all.)

Thus remonetization should be welcomed by political authorities, because it promises reflation - or, in other terms, national bankruptcy and a general restructuring of public and private debt. The Moslerites are certainly right that the world carries too much debt, and that this debt needs to be restructured. Where they err is only in suggesting that this restructuring should be carried out as an ongoing process of massive deficit spending in classic Argentina style.

Remonetization, spontaneous or orderly, is a one-time restructuring event. The smart rich will profit, of course, by early adoption of the new standard in a spontaneous remonetization. It is the stupid rich who will suffer, and perhaps deserve to. Who can defend the stupid rich? Still, as a general friend of order, I prefer an orderly remonetization in which every dollar is equal.

(Another way to state the effect of remonetization: Arnold Kling's recalculation. All prices and positions are new, not just quantitatively but qualitatively. New prices cannot be computed from the old ones; they must be computed by the market.)

USG as an economic entity has two problems. One: it is overcapitalized (has too much debt). Two: it loses more money every year. Both these descriptions are accurate for both the conventional public-sector balance sheet, and the national balance sheet (consolidating public and private). (On the national balance sheet, only foreign transactions appear; the annual loss is the trade deficit, the capitalization is the foreign debt.)

Why do we see an oncoming storm of commodity-price inflation? When America runs a trade deficit and exports net dollars to the rest of the world, it sends those dollars to places with a high marginal propensity to consume commodities. More money chases the same goods, and prices rise. Moreover, as new dollars are being produced but not staying in America, we see an inflationary boom in reserve-accumulating nations (China) but stagnation here. Stagflation is inflation without the fun, like liquor that only gives you a hangover.

In its present operating structure, America leaks cash, like a Soviet car factory. The Soviet car factory may also be overcapitalized; a haircut will maximize the return to its creditors. If it remains unprofitable after the haircut, however, there is no point in continuing operations. The factory might as well be sold as scrap metal.

This is what's so frightening about a money-losing country: the rational option is to terminate all economic activity. In the human dimension, unprofitability disconnects an enterprise from all economic discipline, which is often the only discipline it has left. It becomes depressed and psychotic - especially in the long run. Would you want to eat in a money-losing restaurant? Why would you want to be governed by a money-losing government?

Remonetizing gold, and restoring USG to an allocated-gold balance sheet, fixes both these problems (if the gold price of the dollar is set correctly - about a milligram is my wild guess). It both annihilates past debt, and enforces future financial discipline.

So much for the theory. Let's take a quick moment to apply it to present-day reality. Where should you store your money? This analysis is anything, of course, but financial advice.

First, the incumbent: dollars. All liabilities issued or guaranteed by USG, even informally, are dollars - such as all bank liabilities. All investments whose price is calculated by Ben Graham as a structure of future dollars are also dependent, of course, on the value of the dollar.

The basic problem with the dollar is that new dollars are winding up not in the hands of Bill Gates, but in the hands of Chinese peasants, who use them to bid against global commodities. If USG adjusts its fiscal and monetary policy so that it is not exporting dollars, it winds up with net dollar destruction domestically, which means politically unsustainable deflation. If it eases to avoid this, it bleeds dollars. In the worst case, it is quite capable of both inflating foreign dollars and deflating domestic dollars. The problem is structural: the whole enterprise is unprofitable.

The dollar alchemists are constantly buying future dollars with new present dollars, effectively concealing the high interest rates inherent in a hemorrhaging balance sheet. This need not fool exchange-rate predictors, however. Increasing dollar supply in the hands of commodity consumers produces an upward bias in all commodity prices, kicking off the Flucht in die Sachwerte and creating demand for a new monetary standard. The question, therefore, is whether the dollar has any plausible competitors.

It's worth considering non-dollar currencies. While these may rise against the dollar, their appreciation is constrained by the balance-of-trade buffering mechanism described earlier. Fiat currencies are managed by central banks. Central banks are political actors. Political actors do not like to see industrial destruction, which is what happens when currencies become overvalued. The Swiss central bank, for instance, has to work very hard to keep Swiss army knives affordable to non-Swiss buyers.

The obvious competitor, and almost certainly the final winner: gold. Gold can be revalued to whatever level is necessary to liquidate the dollar system. The high price of a milligram is no obstacle, even if physical gold needs to circulate as cash. A modern gold currency should not have exposed metal surfaces! If a milligram coin is needed, wrap a disc of gold leaf in Lucite. Or simply circulate token coins as warehouse receipts to allocated gold.

The wild card in the gold market, as I hasten to remind readers, is the existence and/or new creation of synthetic or "naked short" gold, presumably by central banks (no one else could hide the losses). If dollar liabilities can be transformed to gold liabilities, currency issuers (central banks) can create infinite synthetic gold to neutralize all monetary demand.

Perhaps this is a crime. If so, the CBs exhibit motive, opportunity, and propensity. The official gold market, including bullion banks, is a riddle wrapped inside a mystery inside an enigma. I would like to see the gold books of all governments, exchanges, and banks. Who is naked? Who is transforming maturities? It won't happen.

Especially if gold longs are indifferent to the exact nature of their holdings - synthetic and backed by hot air, synthetic and well-collateralized, synthetic and government-guaranteed, present backed by future (maturity-transformed) gold, or allocated present gold - "paper gold" is a potent weapon against restandardization. Public service message: insist on allocated or physical gold. If it matters, you'll be glad you did. Fortunately, Chinese peasants do not buy a lot of Comex futures.

There is little real financial activity in the gold market, aside from gold-miner forwards. Gold interest rates are derisory. There is no stock market denominated in gold, though there should be, if only for gold producers. With gold appreciating at 20% a year, this matters very little.

We turn to silver, which has exploded recently. The short story on silver is that silver is the perfect bubble. Silver at $50? Silver could go to $500. It would not surprise me in the slightest. It would surprise me considerably, however, to end up with a new silver standard. If gold and silver defeat the dollar, gold will almost certainly defeat silver.

Eric Sprott, a rare trustworthy source (Bron Suchecki is another rare trustworthy source), outlines the present silver market. It is no surprise that silver is appreciating rapidly relative to gold, because comparable quantities of saving are pouring into each metal. However, because silver was fully demonetized in the 20th century and gold was not, the market capitalization of the gold stockpile is 60 times the capitalization of the silver stockpile. Thus, comparable volumes of gas are pressing in to the gold tank and the silver tank, but the silver tank is 60 times smaller. It is actually surprising that silver has not risen faster and harder.

But this present advantage is also silver's long-term Achilles heel. The silver tank, being so much smaller, cannot take this kind of pressure. It will almost certainly explode. I have personal advice for those playing the silver market: bring your steel balls. If you buy into a bubble when it's small, and get out before it pops, you can do quite well.

How will gold defeat silver? If silver wins, it will go to $500 and well beyond. But consider the dilution with silver at $500! First, it will draw every last silver fork out of the attic. Secondly, today's silver mines are the silver mines which are profitable with silver at, say, $12. The set of silver mines profitable at a price an order of magnitude higher: a considerably larger set.

Because the present stockpile of monetary silver is so small in relation to productive capacity, even present productive capacity, that stockpile is easily diluted. In contrast, because gold was never demonetized, gold is much harder to dilute even if it revalues by orders of magnitude. By Sprott's figures, annual silver production: 50% of the present stockpile. Annual gold production: 2%. As you see, gold is a much harder currency than silver.

Therefore, when gold competes against silver, rational actors choose gold, because silver will dilute much faster ceteris paribus. The secondary feedback loop is dependent on the primary depreciation analysis. Silver, because of its small stockpile, is easy to dilute. Because easy to dilute, it is not a plausible monetary metal at all - it is barely more than industrial metal. And this though "money" and "silver" are synonyms in half the languages in the world. All that silver has going for it is tradition, and this is not enough - not when gold retains so much of its Victorian monetary structure.

Finally, we examine a new contender - the mysterious and awesome Bitcoin.

I'll be frank with you, dear reader. When I came up with the MoMT, my first thought was: how can I, Mencius Moldbug, make some damned money from this? As system software is my first love, it was not that hard to think of an answer. In some ways Bitcoin is actually much better designed than my design, which was not distributed. The use of Lamport hash chaining is particularly elegant. I did not wind up building my design, however, because I sensed a problem. Bitcoin has the same problem, but worse.

But the basic economic design is the same: an artificial currency of limited supply. What is the currency backed by? Nothing but speculation and hot air. Note that this (contrary to its exponents' claims) violates Mises' classical "regression theorem." MoMT has no problem with an unbacked monetary candidate, because the required epsilon can be provided simply by the probability that the monetary system is adopted.

If Bitcoin becomes the new global monetary system, one bitcoin purchased today (for 90 cents, last time I checked) will make you a very wealthy individual. You are essentially buying Manhattan for a quarter. There are only 21 million bitcoins (including those not yet minted). (In my design, this was a far more elegant 2^64, with quantities in exponential notation. Just sayin'.) Mapped to $100 trillion of global money, to pull a random number out of the air, you become a millionaire. Wow!

So even if the probability of Bitcoin succeeding is epsilon, a million to one, it's still worthwhile for anyone to buy at least a few bitcoins now. The currency thus derives an initial value from this probability, and boots itself into existence from pure worthlessness - becoming a viable repository of savings. If a very strange, dangerous and unstable one.

I think the probability of Bitcoin succeeding is very low. I would not put it at a million to one, though, so I recommend that you go out and buy a few bitcoins if you have the technical chops. My financial advice is to not buy more than ten, which should be F-U money if Bitcoin wins. Or, of course, you can invest in those alpaca socks.

Here is the problem with Bitcoin: the tank, I think, will pop. This is not due to any technical fault in Bitcoin's algorithms or economics. It is due to a political fault in our society, which is that we're governed by dumb people.

Because we're governed by dumb people, here is what I think will happen with Bitcoin. Stage 1: Bitcoin does not exist. Stage 2: Bitcoin exists, but is worthless. Stage 3: Bitcoin exists, and is used by strange and desperate weirdos and geeks. Stage 4: Bitcoin is used by Slashdot readers, perhaps slightly less desperate. (You are here.) Stage 5: Bitcoin is used by criminals. Stage 6: All Bitcoin exchanges are shut down by USG. Stage 7: Bitcoin exists, but is worthless. Stage 8: Bitcoin does not exist.

At least on the surface, Bitcoin exchanges violate the critical know-your-customer rule which USG enforces on all money-transfer businesses. As a money-transfer business, you are essentially an agent of the government - a spy. To a regulator, Bitcoin seems like a way to transfer arbitrary quantities of money anonymously. This is a nonstarter, and the regulator knows exactly whose necks he has to squeeze - the spies who are not doing their jobs.

He cannot shut down Bitcoin itself. He can trivially shut down Bitcoin-dollar exchanges, or even Bitcoin-gold exchanges. Probably seizing all their dollars, etc. He probably can't seize their bitcoins, but it doesn't really matter.

To save in a currency is to place your trust in that currency. If you put energy into this great collective battery, you have to be able to get it back out. If that trust can be convincingly damaged, the currency has no chance. If people lose money in bitcoins, the currency can never recover. No one will ever again exchange it for dollars, or even alpaca socks. It will be dead. Its chances, now and forever, will be zero - not even epsilon.

If Bitcoin was centralized - sacrificing all real coolness - it could deal with this problem, perhaps, by applying KYC to all dollar transactions. But Bitcoin is not centralized, so there is no way the development team can prevent exchanges from operating. These exchanges are obvious targets for numerous predatory authorities. When they are destroyed, the currency dies.

What is Bitcoin's only chance? Perhaps that Bitcoin is not really anonymous. In fact, it is anything but. All transactions, though pseudonymous (named by a random key), are public and can be tracked by anyone, including said authorities. There is no financial secrecy in Bitcoin - it's a completely transparent system.

Which means that, if money launderers try to launder money through Bitcoin, they are actually doing the authorities a massive favor. It is very easy to track dirty bitcoins. If you know Pablo, a drug dealer, is using Bitcoin address X, you can download the entire graph of parties that X trades with, and roll up Pablo's whole network. Instead of shutting down the real-money exchanges, you can secretly force them to send you their entire customer database. That way, the terrorists, drug dealers, etc, are not hiding their transactions at all - they are sharing their most intimate details with the government. Heck, the DEA probably understands Pablo's finances better than Pablo's own people. That's what he gets for using Bitcoin.

But, as I said, we are governed by dumb people. Or, worse, committees of smart people. Therefore, I reiterate my target price on bitcoins: epsilon. Nonetheless, it probably wouldn't kill you to go buy five or ten - not that this is financial advice.

moldbug should probably read the state theory of money by knapp, for example, before dismissing it out of hand. its possible that gold was chosen by the market as money, as per menger. its also possible that the gold was chosen by the state to denominate debts to itself (taxes), due to its rarity, so as to prevent counterfeiting. he should at least read the knapp school in addition to the menger school, before deciding.

this stuff is all shrouded in the mist of prehistory. no one knows how it happened. a priori reasoning most emphatically does not and can not tell us what actually happened in history, in what order, etc. that is a conceit of the misesians... to assume the correctness of menger over knapp, is just that, an assumption.

taxes probably precede inter-state commerce in historical order. gold probably facilitated interstate cmommerce, where two zones of sovereignty exchanged, without one forcing the other to accept a legal currency. but, previous to that, within a single sovereign zone, anything could have functioned as legal tender, as long as it is difficult or impossible to counterfeit.

there is a lot of scholarly work on the history of credit and the role of the state therein. some believe the concept of credit/debt preceded the concept of money in historical development.

Ben, USG will always have many orders of magnitude more police and military than you have friends, children, and clients. So your advice there is of no practical use. Maybe if you lived in Libya.

Friends and children are valuable investments in a time of economic turmoil, but not because of their function as an infantry platoon. Rather because they function as a mini-commune, and pooling risk is important the closer you are to the edge.

As for guns: what will the gunbugs do when USG decides to confiscate their guns? It's the same problem, except that the government can be expected to be far more trigger-happy when it comes to grab your guns than when it comes for your gold.

Ah, you'll hide your guns? Well, one can also hide gold. And much more easily than guns, because the volume of an effective cache is much smaller, and you need not worry about environmental degradation.

"These shares convey no corporate control and pay no dividends, but this does not make them worthless - the same could be said of Google's A shares, or even of Delta SkyMiles. USG redeems its paper for concrete benefits at its pleasure, as with any and all equity instruments."

No. They gain no worth from being USG equity, which they are not. They are in no sense shares. They gain all their worth from being money. The fact that the USG will accept them for taxes is because they are money, not equity.

What you say about the USG having no debt because it is denominated in fiat currency which it can print is true.

Yeah, um, I'm holding silver. I'm happy to bet that the implied discount rates are wrong and that the historical silver/gold ratio will revert to the mean. Even if it turns out to be a bubble, gold is likely to be the leading indicator to burst as speculators start playing the spread.

One assumes that monetary standardization is inherently a sovereign function: the monetized good in any economy is what that economy's government wants it to be. Alas, we live in an age of state-sponsored economics, whose state-sponsored economists easily assume this chartalist theory. Chartalism by definition precludes spontaneous restandardization.

Chartalists don't necessarily claim that some commodity can't become money by a "normal market process."

They argue that a sovereign can establish a fiat currency by the simple expedient of taxing something you do and then demanding that you pay your taxes in the fiat currency and punishing you if you don't. The fiat authority of the money is limited by the ability to punish.

They don't claim that this is always possible. Obviously if the sovereign doesn't have sufficient power to enforce it then it can't establish it.

It's remarkable that Mencius doesn't recognize this when he's always arguing that an authority can use force to kill everybody it has to in order to establish itself as sovereign, whether at home or in some colonial enterprise. Just as Mencius says that the US military can and should bomb and kill everyone in Afghanistan until the Afghans submit to and accept US sovereignty, the US military could kill everyone who doesn't accept taxation in the currency. The limitation is the power to enforce sovereignty and taxation.

Money is backed by promises, and promises can be classified as one of:

- Promises to do something of value on presentation of a token. (ie: commodity-backed money)

- Promises to not do something damaging on presentation of a token. (ie: protection-racket money otherwise known as “fiat” money which is backed by the promise not to throw you in jail if you present it as legal tender for taxes)

People seem to think that it is important to have only one currency as “the standard.”

Prior to desktop automatons pushing electrons around as tokens and ‘zero-risk’ arbitrage algorithms for money markets, this may have been necessary but discovery and transaction costs are now so low there is no reason for it.

If I issue currency without a promise to give the bearer of the currency something of value in exchange, there will be no demand for it — UNLESS — I create demand by threatening to harm those who DO NOT obtain it.

That’s where taxation steps into the fiat shoes.

I can bootstrap a fiat currency by the simple expedient of taxing something you do and then demanding that you pay your taxes in fiat currency. You don’t acquire it? Then I punish you. The fiat authority of the money is limited only by my ability to torture you.

Federal Reserve money buys protection from punishment. You are punished if you don’t pay taxes. This has become the Federal Reserve’s primary monetary authority. The moral hazard of basing monetary authority on punishment has now been realized in the systemic and out-of-control gang rapes of prisoners in the US. All other unlawful acts by US governments are now overshadowed by the murderous, sexually sadistic character of governmental authority that has developed in US penal systems. Federal Reserve money is now protection racket money, or, if you prefer “punishment protection money”. Calling it “fiat money”, “debt money” or even “legal tender” obscures its true character.

"If gold interest rates are 20% and silver interest rates are 10%, which would you prefer to hold? Would you say: look at those juicy gold rates, I should be in gold? You mean not "hold" but "invest in" - a very different concept. If you can invest in gold at 20% or silver at 10%, whichever currency you start from, the decision is neutral: the increased return in gold will be canceled by the expected currency depreciation.

Are you willing to exchange present money for discounted future money? In other words, to lend? Bear in mind that lending does not decrease the set of currency holders. If you lend money to someone, it's because he either wants to hold it himself, or lend it to someone else who will hold it. Thus, we cannot evade the contest for holders. The true saver is the "hoarder," not the lender.

If gold rates are higher than silver, everyone should (ceteris paribus) prefer to hold gold rather than silver - simply because silver is depreciating against gold."

Why should what you want to hold and what you want to invest in be different? And if the silver discount rate is 10% and the gold discount rate is 20%, doesn't that mean that gold is depreciating faster? So why does he say that silver is depreciating against gold? Does a higher discount rate not imply faster depreciation?

Unfortunately, I lost all my silver and gold in a boating accident. But brass and lead as well as the delivery systems are important as are friends and family.

Leonard, I don't see the USG being as successful as you think it would be. Not enough cops, soldiers, marshals, etc...You'll see a break up and big time. Think NOLA/Katrina and USG effectiveness, but on a national scale. Desertions too. Look at what the Finns did do the Russians too. Fine stuff. Do yourself (and family and friends) a favor and prepare. Highly effective firearms don't cost much or look assault weapon-y. And they will put meat on the table...

What the hell are you discussing about? Do you know what are you talking?? For eg:

"The pons asinorum to success in the Flucht is to reverse the normal investor psychology of avoiding the crowded trade, and crowd instead into the most popular trade, finding the most overvalued good. This will become the standard trade: money, which is the bubble that never has to pop. The strategy is a Nash equilibrium: the correct strategy for everyone to follow, if everyone follows it. It needs some refinements, of course, discussed below."

From previous writings, it is clear that Mencius does understand the role of taxation in creating fiat currency. Under his theory, this helps the dollar become the "bubble that doesn't pop" and makes it harder to displace, but once it becomes the Nash equilibrium choice/standard/whatever, the dollar's value as "money" (in Mencius' terms, the good which we "cache") dominates its intrinsic value as a get out of jail free card.

Regarding the dollar as sovereign equity, perhaps someone with finance knowledge can help me out. Why do stocks that never pay any dividends respond to the underlying value of the company they represent? What's the difference between google A shares and Albert Pujols baseball cards (which incidentally do not represent equity in the Topps company)?

Why do stocks that never pay any dividends respond to the underlying value of the company they represent?

Because the company is valuable, and the stocks are shares of ownership. By law, they are entitled to equal benefit from the company. The corporation has a legal responsibility to treat shareholders equally in respect to any monetary payouts; if it does not, it is vulnerable to shareholder legal action to make it.

In the abstract, paying dividends, or not, doesn't change the underlying reality of things. Say your company has a 100 million shares, and a billion dollars of profit in cash on hand. Its value is thus $1b higher, as a result of having cash on hand. This value is pro-rated per share; we should expect a stock price roughly $10 higher. Now say the company pays out the entire profit as a dividend. Each shareholder gets a check for $10; the stock price can be expected to drop by $10. Thus a shareholder is no better or worse off by the dividend. (In practice, modern companies tend to eschew dividends because they are taxed at a higher rate than capital gains; this is a market distortion caused by USG taxation.)

no understanding of balance sheet. no understanding of double entry bookkeeping.

MMT is call "modern monetary theory" because it is about "modern money" ie. "fiat money". Fiat money is direct manifestation of sovereign power. your beloved colonial english understood this clearly as they 1st set hut tax (showing natives who was boss) and then setup plantation paying scrip that would save your hut from the burning.

you can have gold or non-fiat currency sure, but it is a sovereign diminishing his own power, and thus his own ability to act (act responsibly, if responsible sovereign).

I guess, when push comes to shove, you are not as reactionary as you think. Instead of letting that which is ceasers be ceasers, you are hold out for one area of Progressivism -- gold standard! I am wondering what communist value you will embrace next.

Broad franchise is bad idea for politics and for money. A Sovereign that bounds himself is pussy and idiot.

What prevents bitcoin exchangers from complying with USG demands for know your customer rules? There was at least one complicit exchanger (though it was closed due to low demand :) Nobody wants to send their documents to exchanger yet, but this will change in the future with no alternatives.

I think MM's characterization of the definition of money and the monetary system is the best out there. That said, I doubt actually that if the fiat currency system collapses gold or any other metallic standard will replace FRNs. Instead my guess is that in that situation we see a return to a barter economy. Any sort of currency system requires trust between strangers. The collapse of the U.S. currency will correspond with the complete breakdown of social trust.

If, as MM discusses, USG actually switched to a gold standard prior to the collapse of the existing monetary system, this might mitigate the problem, except that to do so would require either an overthrow of USG or an admission that monetary authorities have been lying - neither of which event is conducive to preserving social trust.

After a systemic collapse and return to barter economy, I agree that a metallic monetary standard is the most likely eventual monetary Nash equilibrium.

Those predicting a "bitcoin" or other electronic currency replacing the FRN system are bananas. You assume that following a complete collapse of the modern monetary system, the U.S. electrical power grid will continue working to such a degree that the internet will keep working. This is pure, unadulterated fantasy.

Caloric food is not a good barter item. Hungry strangers tend to distrust or dislike someone who clearly has surplus food yet is unwilling to share it. "Bartering" with surplus food is likely to get you robbed or killed for your trouble. The same goes for gasoline or other fuels.

I always thought that Moldbug gave too much attention to the Unitarian-Universalists who are a minor sect of old white liberals with rather small dwindling numbers. They served as a way-station in the 1890s for those migrating from liberal Christianity to out and out secularism. And Liberal secularism in both its traditions classical and welfare. Since Moldbug is basically a Darwinian-Libertarian he is as much an offspring of Unitarianism in that sense as well. But there was an interesting quote at Freerepublic about Obama's Church the UCC (which is the direct heir to the Calvinist church of the Pilgrims) that I thought would be very relevant. It refers to a quote from the great Catholic Belloc. Although Belloc was no freeper, he was anti-liberal both socially and economically. And his support of Jacobinism and Distributism, reveal the extent to which American conservatism is really liberal individualism. America is shaped by never being Feudal Catholic, born Protestant Capitalist. No feudalism, no welfare state. Anyway the quote itself-Isn’t Unitarianism a futher ‘evolution’ of the Calvinistic Congregationalism? Denying the Trinity, belief in a severe God (at least in New England), pre-determinism and iconoclasm. Sounds a lot like Islam, which Belloc noted to be an especially powerfully heretical, and clearly anti-trinitarian, branch of Christianity.

Moldbug, you shouldn't write after drinking this much wine. This post compares very poorly to those of 4-5 years ago, and you even misspelled something (post tl;dr for me to go back and find what it was).

Certainly barter economies do not exist in the long run. Thus Menger's insightful description of the origin of money. In the long run barter is an obviously inefficient medium of exchange and will be superseded either by non-market social functions or by money-markets.

However, in the short run following a collapse or partial collapse of the social trust system, barter economies absolutely do exist, as evidenced by the 'black market' barter economies in Britain in WW2, most of Eastern Europe during WW2 and the decades after, and the former Yugoslavia during the separatist wars. From these we have eyewitness, participatory evidence that barter economies actually existed.

I think,to do justice to our distinguished host,it should be noted that USG using force to shut down bitcoin and USG using force to confiscate gold or guns are two very different things.Certainly the Grand High Idiot Committee has confiscated both gold and guns, and anything else that make people less dependant on the Committee - but those are "high level" decisions, requiring "consensus"(Not ours,theirs). Putting people who directly compete with them in the business of fiat money creation out of business, or even behind bars,is simply business as usual,though. Something to do the Law of Conservation of Imperium. That said, if we are to come to the sort of dystopia scenario that talk of gold or guns imply in this context (a possibility which I do not discount)then my money is on ammunition,tobacco and whiskey,or other things with actual intrinsic value,which are easily hidden, traded and smuggled, and do not assume the ability of a people who have not used gold for three generations to be able to evaluate its purity,weight, and relative value before a transaction can take place.

We are a social species, with the moment of adaptation currently occurring between social entities called nation states.

What binds any social aggregate together is the group return-on-coordination. That return scales beyond anything an individual can achieve alone.

Even in small groups, diverse data patterns fluidly combine to produce real-time fluctuations in affinity. With scale, diverse value propositions fluidly combine to set the perceived value of a public currency monopoly to partially replace distributed affinity - but those valuations always must still always be fluid, by definition, since contexts are fluid.

The only "standardization" that offers survival value is group convergence to recognize the primacy of return-on-coordination.

All fluid definitions of the "value" of commodities, money or currency are simply tools to be artfully used in group strategies and policies.

rge270: Anyone can abstractivize the real to actualize the communicative post-structure of nothingness.

Obviously, as in all things, there are lines of articulation segmentarity, strata and territories; but also lines offlight, movement deterritorialization and destratification. Comparative rates of flow on these lines produce phenomena of relative slowness and viscosity, or, on contrary, of acceleration and rupture.

Translation: "I don't grasp deductive logic, and therefore only empirical evidence is compelling to me. I don't understand that economics can't be studied quantitatively, and don't understand that the "dismissals without explanation" are the parsimony of logical exclusion in action. This is why I don't offer any refutation of moldbug's premises or inferences, but instead engage in the lazy rhetoric I accuse him of."

To clarify, by that I meant that economic analysis can't be inductive. Obviously you can study facts, but for them to mean anything there has to be interpretation. The interpretation is what is economics, and that must proceed deductively.

No, the moment of adaptation occurs between individuals engaged in trade in what is left of the market. Nations are reactive, not adaptive, and are coercive entities, not social ones.

"Nation" is a vague term. It's far removed from its original meaning of a kin group. Today it's used to refer to a wide range of very different entities from blood based tribes to multiracial imperial civilizations.

These entities can be adaptive groups in different ways. Kin groups can be adaptive groups at the genetic and cultural level. Multiracial imperial entities are made into adaptive groups via words, money, etc.

The fact that coercion is involved doesn't mean it's not a social group of course. Eusocial species of insects employ force not only against other groups but also internally as well. A parent uses force to discipline and control her child and the family is certainly a social group.

Quote: "annual silver production: 50% of the present stockpile. Annual gold production: 2%. As you see, gold is a much harder currency than silver."

See that's a rookie mathematician's mistake: Sure the first year you start to stockpile on it you get a mass dilution but what about after you stockpile for a few years? Yeah you figured it. It ain't 50% any more as your gather enough after years of stockpiling, it becomes much less and bearable as a choice of money.

The chickenhawk armchair warrior talks about how easily Vietnam could've been won (completely ignoring possibly greater action and intervention from the USSR or China) and yet always tries to suggest that currency backed by the sovereign's ability to tax is some kind of extremely precarious enterprise.

To clarify, by that I meant that economic analysis can't be inductive. Obviously you can study facts, but for them to mean anything there has to be interpretation. The interpretation is what is economics, and that must proceed deductively.

The deductive "interpretation" is just a big tautology beginning from its foundation of the subjective theory of value. It doesn't tell you anything.

"completely ignoring possibly greater action and intervention from the USSR or China)"

is actually a good point! Indeed, there may have been such problem with actually implementing a militarily sound strategy, and MM did not bring these up.

Anonymous, of course, is a complete idiot on average. Complete waste of time to pay attention to except by accident.

Anonymous, are you a complete idiot? Sorry, trick question.

Anonymous is ignoring Moldbug's actual point, that being that the Vietcong was defeated. Neither China nor the USSR in fact saved them.

This point is supporting the broader point that State consistently interferes with prosecuting wars effectively, and you can predict which regimes will end up having to be 'changed' by their relationship with State.

To which I'll add: the correct answer, if you're worried about Russian or Chinese counter-moves, is to simply concede Vietnam. Don't even go.

Either way, like the mounties, logic gets its man. Vietnam was a game, not a war. It wasn't planned as a war and it wasn't prosecuted as a war. Moreover, it was a game of USG vs USG. (USG was firmly convinced it was playing Russia and China, and was using them as pawns against USG. USGs were the only players on the board - in their opinion, at any rate.)

Anonymous also couldn't be more wrong about money. Don't hold it against them though: this is anonymous we're talking here. Poor thing.

Some think USD is backed by debt. Well, you can try that at home: I started a Bank of Alrenous and tried to issue myself a bank note backed by someone's promise to repay the bank note.

Go ahead. See how much sense that makes. By the way, want a loan? Quick approval and cheap rates!

Anon thinks it's backed by the ability to tax.

So, er, can Zimbabwe not tax? Can Greece not tax? Did Weimar Germany lose the ability to tax?

Prices are set by supply and demand. Always. Forever. Even for aliens, should any exist.

USG has legal tender laws - I have to accept payment in dollars if it is rendered. However, I can always just ask for a billion dollars if I'd prefer to be paid in deutschmarks or kronor or gold or oil.

And if my product's price in gold is a billion dollars worth of gold, that is exactly what I'm going to ask.

"Can Greece not tax?"Actually, that's pretty much it. Greeks are pretty notorious for not paying taxes.

I think you're missing the point if you talk about the Viet Cong being "defeated". Sure, they never recovered their losses from Tet (estimated total NVA/VC strength of 420,000 in the beginning of the year, 332,000 at the end), but there was still an insurgency killing plenty of people. The fact that it was not the VC but NVA which conquered South Vietnam makes everything preceding it seem rather pointless.

What was the actual purpose of the war? The standard interpretation that a series of U.S administrations wanted to prevent their client state from falling to the communists but underestimated how costly that would be and eventually tried to cut their losses and leave seems to fit the facts fairly well.

Yeah, that's the exact kind of explanation you can just trash out of hand.

It's official, therefore, if it appears to fit the facts you're missing most of the facts.

If, after exhaustive search, you can't find any more facts, then it starts being worthwhile to consider perhaps digging that explanation out of the trash. Though I've never actually had to - every official explanation I've tested has been wrong.

Facts such as that the war almost could not have been run more incompetently.

As in, I personally could have commanded it better. The Pentagon broke almost every basic tenet of war there is. They were (and are) playing by a gaming rulebook imposed by their political games at home. You can be incompetent, but you can't be so incompetent you think just letting people shoot at you is good strategy. Or at least, you can't both be that incompetent and also communicate your incompetence with sentences. The drool gets in the way.

Such as the fact that, as usual, an element of the right wing predicted something, was blocked by the left from fixing it, and was vindicated - oh, and breaking that thing happened to benefit progressives. Just coincidentally, I'm sure.

Such as the fact that State thought Stalin and Mao were their clients.

Does the fact that Vietnam was perfectly stable as a French client state count? They could have left USG alone, but USG just couldn't leave them alone.

No, that official explanation has that airy, breezy nothingness that almost all empty excuses have. It barely explains a fraction of the observable facts.

"Facts such as that the war almost could not have been run more incompetently."Oh ye of little imagination. If we take a source Mencius has cited, Mark Moyar claims the Phoenix program was quite successful.

"Does the fact that Vietnam was perfectly stable as a French client state count?"What the hell are you talking about? Leaving aside the pre-war rebellions of 1885 and 1930, Vichy France granted control to the Japanese. It was then that the allies started arming Ho Chi Minh. The French were fighting to regain control they had lost, and they didn't succeed (leaving aside the reasons why).

"Such as the fact that, as usual, an element of the right wing predicted something, was blocked by the left from fixing it, and was vindicated - oh, and breaking that thing happened to benefit progressives"Which specific prediction are you referring to? And it seems to me that the right benefited from the reputation liberals received from Vietnam. Nixon had famously dropped out of politics, saying they wouldn't have him to kick around anymore, then he gets elected twice. In the middle of the twentieth century writers for National Review stumped for Congress over the executive branch, since Vietnam the White House has more often been in Republican hands to a significant extent because of their greater perceived competence when it came to defense (recently trashed under GWB). And when the Carter and Clinton attained they White House, they didn't accomplish nearly as much as previous Dem presidents.

"Such as the fact that State thought Stalin and Mao were their clients."Which period are we talking about now? Starting with the Long Telegram that's a (perhaps unfairly) marginalized viewpoint rather than something you can offer as a fact.

Admittedly, I haven't read much on the French period of the war. Du Berrier is sympathetic to the French, but he's mainly arguing that Bao Dai would have been a better leader of independent Vietnam than Diem, while Mark Moyar stumps for Diem and at best ignores the French.

Some think USD is backed by debt. Well, you can try that at home: I started a Bank of Alrenous and tried to issue myself a bank note backed by someone's promise to repay the bank note.

Am I a member of your family or tribe and is that promise made by another member of said family or tribe to be enforced by the family or tribe's force, shame, etc.?

Is that promise backed by a legal and martial entity's promise to torture, imprison, kill, etc. that someone if he doesn't repay?

Nuclear families, extended families, tribes, clans, etc. generally practice varying degrees of kin altruism and "extend credit" amongst their members all the time as a part of normal, everyday life. As a part of kin altruism, it's on very generous terms. Most of it isn't even recorded.

With denser and genetically more distant populations created by agriculture, mercantile activities and transactions based on reciprocal altruism increase. This is where accounting comes in, as complex, sophisticated transactions based on reciprocal altruism need to be written down, recorded, and remembered. Group force in the form of police, military, law, etc. then enforces those accounted for transactions between strangers.

Anon thinks it's backed by the ability to tax.

So, er, can Zimbabwe not tax? Can Greece not tax? Did Weimar Germany lose the ability to tax?

Zimbabwe taxes.....Zimbabweans.

Greece taxes Greeks who aren't that great at earning Euros in order to pay back Euros they borrowed and spent and wasted.

Weimar Germany had massive foreign loans and reparations to repay in foreign currencies.

Prices are set by supply and demand.

I never denied supply and demand.

USG has legal tender laws - I have to accept payment in dollars if it is rendered. However, I can always just ask for a billion dollars if I'd prefer to be paid in deutschmarks or kronor or gold or oil.

I don't deny that commodities or commodity backed paper can serve as money. That is one kind of promise.

Another kind of promise is to not do anything bad to you i.e. a protection-racket.

If you want to eat, you need to buy food. If you want to buy food, you need dollars to trade for food at the grocery store. If you need dollars, you need a job. If you have a job, you have to pay taxes.

Maybe you're a subsistence farmer. You don't need to buy food. Well you need land. If you have land, you have to pay taxes.

If you don't pay taxes, they'll send you (presumably a white nerd) into prison, where you'll be subjected to HIV infected rape and or killed by black and Hispanic gangs.

Most people don't want to starve or be raped and killed by HIV infected blacks so they engage in economic activity and pay taxes.

I'm not going to bother digging up the link, but MM definitely acknowledged the value of the dollar as a "do not rape" card. He calls it one of the benefits of equity. Nevertheless, his money-fundamentally-as-means-of-saving hypothesis has not bee refuted. Gold also has an industrial value, however, the demand for dollars and gold is dominated by its use as money. Otherwise, I would hold just enough to not be raped. Of course, if money exhibits the Highlander effect (it now seems to be a 'weak' Highlander hypothesis that MM is pushing), the do-not-rape value of a fiat is going to make it pretty hard to displace as money, especially considering that the government can theoretically ask for arbitrary amounts of the stuff. On the other hand, it seems to be pretty hard in reality to raise taxes on anyone and half the country doesn't pay taxes anyway.

Do Modern Monetary theorists not accept that the exchange rate between dollars and other goods is driven largely by demand for dollars *not* to be used to prevent prison rape?

zimbabwe government is very weak and cannot tax. that is definition of weak govt. go to any third world country and you will see massive tax evasion.

greek is even worse than zimbabwe in some ways, as they have tax culture of third world country and, after joining euro, cannot print money either. they are no longer monetary sovereign -- they can castrato themselves just as Mencius wants all governments to become weaker sovereigns and give over power to the People (in this one area -- everywhere else it is bad. what a joke!)

not-rape value of a fiat is going to make it pretty hard to displace as money, especially considering that the government can theoretically ask for arbitrary amounts of the stuff. On the other hand, it seems to be pretty hard in reality to raise taxes on anyone and half the country doesn't pay taxes anyway.

Josh: of course general price level is determined by supply and demand. but people also want savings in some mix of currency and real good (e.g. bank account and land/gold/whatever). MMT understand this. But, whether your nominal currency is Josh-buck or US$ depend on whether Josh or USG can enforce tax. Fiat currency is manifestation of sovereign power, and it is sovereign power that sets Mencius' "Nash Equilibrium". If all governments on earth fall, then yes we will go back to gold probably, until some new government can rise up and tax in its own scrip, which it will promptly start printing, and we will promptly start exchanging our labor for to avoid prison rape

sovereignty my ass. current legitimacy is based on the economic system per se, not on the US and therefore not on the dollar per se -- which it merely supervenes on. maybe this is what MM refers to when he keeps tossing in "nash equilibirum."

it's funny how MMT is being treated as somehow more "real" than the alternatives, when it clearly represents another level of rationalization of politics via economics -- a level less real. the idea that currency systems have independent existence from the nations that legitimate them is a regurgitation of the concept of fate. if it seems true it's mostly because your own liberal brain has been pre-rationalized to digest it

this is a late-capitalist update of austrian economics. it treats economics as a special variant of social science. call it subjective macro.

it assumes dollar hegemony is a priori and takes it from there. hence veil of money is veil of power: american power has both a nominal and commodity character.

hence, again, that american debt is transmission of power -- or weakness. either way, when america runs deficits, it owns you.

so, interesting -- but what does it do? according to this theory, isn't taxation simply a mechanism for reorganization of american power? deflation is then inherently democratic (conserves american power) while inflation is liberal per se -- globalist

> if money exhibits the Highlander effect (it now seems to be a 'weak' Highlander hypothesis that MM is pushing), the do-not-rape value of a fiat is going to make it pretty hard to displace as money, especially considering that the government can theoretically ask for arbitrary amounts of the stuff.

I agree with your skepticism of that stuff - 'theoretically' is just the concept with which to interrogate this not-rape stuff. What kind of hostile actions will USG do, in practice, to back the dollar - and what percent of the people will they be willing to do it to? I say not that much. The more people they fuck up, and the harder, and the more the victims recognize and protest this, the more they feel guilty. Also, their (e.g.) letting Blacks physically assault Whites (and make them buy pricey houses) is not psychologically equivalent to causing the exact same harm by their own positive acts. Especially, but not only, when they do in fact do quite a lot to mitigate this harm, namely lock up a wildly increasing fraction of the population, mostly NAMs. (Not all of this growth is caused by increasing penalties and enforcement but some is.)

If they want to simply confiscate gold by force (ie by threats), that might be more effective than applying force to people who do not pay a dollar ransom. Still, just because it was confiscated by FDR or whoever doesn't mean it can be confiscated now using threats of the same severity. The public that FDR ganked it from had an enormous cohesion through mutual love and liking, great esprit de corps, and great trust in government - all of which is now entirely wanting. That meant that the minimum effective threat for FDR to use was moderate, though it wasn't small.

No, sorry, the term you used was "nation state," which is not a vague term, and in the context of my reply is obviously what I meant by "nation."

>The fact that coercion is involved doesn't mean it's not a social group of course.

To the extent coercion is involved, sociality isn't, group or no.

>A parent uses force to discipline and control her child and the family is certainly a social group.

To the extent a family uses force, no, it isn't social. Sociality and force are exclusive. They can co-exist within a social structure, but they are exclusive, by nature. Calling force social is like calling wet dry.